Court holds off on James Hardie tax case

James Hardie
will have to wait until at least February to find out if the High Court is willing to hear the Australian Tax Office’s appeal against one of the company’s subsidiaries.

The ATO applied to the High Court in September for special leave to appeal against the decision, after three judges in the Full Federal Court upheld an earlier appeal by RCI, a James Hardie subsidiary, in August this year.

The tax office alleges RCI tried to avoid paying capital gains tax when the group restructured in 1999.

Were it to lose the case or if the High Court declines to hear it, then the ATO would be forced to refund at least $242 million that has been paid by James Hardie on the amended assessment and interest costs, as well as a portion of RCI’s legal fees.

The High Court was expected to hear the ATO’s appeal before year-end, but that has now been extended to at least February, according to a James Hardie spokesperson.

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It is likely to take until the second half of next year for the hearing to begin if the High Court agrees to hear the case.

James Hardie has already reflected the liability on its consolidated balance sheet. The group incurred a $US345.2 million ($336 million) charge on its balance sheet during the 2011 financial year after losing the original appeal in 2010.

When James Hardie was notified of the ATO’s application for special leave, the group affirmed no cash would be exchanged between RCI and the ATO until the matter was resolved.

The outcome has major implications for the Asbestos Injuries Compensation Fund, which is funded by James Hardie as part of its obligation to contribute 35 per cent of its free cash flow to the fund.

James Hardie’s contributions to the AICF have been affected by lagging housing construction activity in the US and Australia. The group made a $US85.8 million contribution to the AICF after its 2011 full year results.

A loan facility up to the value of $320 million was organised between James Hardie, the NSW government and federal government in 2006 and approved by James Hardie security holders in 2007. The facility covers any funding shortfall in the immediate term.

Stockbroker Nomura Equity Research estimates James Hardie would be left with approximately $157 million after asbestos payments, which it could use to accelerate the group’s on-market buyback.

James Hardie has not outlined what it would do with the proceeds if the High Court finds in its favour, but has previously hinted at launching a new fibre cement plant in Australia.

In May, James Hardie reinstated its capital management strategy, which involves distributing 20 to 30 per cent of profits after tax, excluding asbestos adjustments, as ordinary dividends and taking a more “active approach" to capital management. The strategy includes buying up to 5 per cent of the group’s capital on the market over the next year.

James Hardie beat market expectations for the half-year, mainly because of a strong result from the Asia-Pacific business.

Following the profit report, Deutsche Bank highlighted that while James Hardie had been able to deliver strong returns in the US regardless of the low level of activity, housing foreclosures were worrying. According to Deutsche Bank, housing foreclosures had risen in the previous three months and the broker questioned how soon a sustained recovery in the market would eventuate.